Investor Critical Baseline Money Printing Realities
Stock-Markets / Financial Markets 2013 Feb 02, 2013 - 06:36 PM GMTBy: DeepCaster_LLC
"Money printing creates illusory wealth and buys time, but if it was truly the answer to a deleveraging cycle, Zimbabwe would be a member of the G10."
David Rosenberg, Gluskin Sheff, 1/29/2013
Cleansing all the Recovery Hype off one’s Boots, it is well to remember the Key and Threatening Baseline Reality which David Rosenberg notes.
The recent Equities Rally and Glimmers of Economic Recovery are Artificial because they have been bolstered up on a Tide of Central Bank created liquidity (via QE etc.).
They have not been generated in the healthy sustainable way by savings and Investment.
Therefore, it is highly likely they are Transitory.
Given the Daunting Challenges facing the U.S., Eurozone, China, Japan, and other economies, and the understandable Investor uncertainty about how these challenges will be met, it is essential to review Key Baseline realities Critical to Profitable Investing.
As repeated Doses of QE become less effective, the Central Banks, specifically The Fed and BOJ, resort to a related Baseline Reality: Money-Printing-to-a-greater Degree than other Central Banks, i.e., to Currency Devaluation.
This functions to make Exports Cheaper thus boasting local Economies.
This facilitates two other Baseline Realities, Impending Hyperinflation (see below) and Debt Saturation.
The Debt of Major Sovereigns such as the U.S., U.K., Japan and France, simply can not be paid under any reasonable Economic Growth scenario.
Therefore, Central Banks resort to more and more Debt Monetization/lending so that interest, at least, can be paid.
Of course, this ever-growing Debt Burden stifles Economic Growth as Japan has for two decades seen and the U.S. and Eurozone are now seeing.
Of course, any honest observer will admit that the resulting ‘Credit Supernova’ as Bill Gross, Founder and chairman of PIMCO (with $2 Trillion under management) notes, is not sustainable, and thus is quite threatening.
“Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year.
Not only is more and more anemic credit created by lenders as its “sixteen tons” becomes “thirty-two,” then “sixty-four,” but in the process, today’s near zero bound interest rates cripple savers and business models previously constructed on the basis of positive real yields and wider margins for loans. Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene. What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion. In effect, the initial magic of credit creation turns less magical, in some cases even destructive and begins to consume credit markets at the margin as well as portions of the real economy it has created. For readers demanding a more model-driven, historical example of the negative impact of zero based interest rates, they have only to witness the modern day example of Japan.
So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return.
The element of time is critical because investors and speculators that support the system may not necessarily fully participate in it for perpetuity.”
“Credit Supernova!”
William H. Gross, Founder and Chairman, PIMCO, 1/31/2013
But this Orgiastic Expansion of the Money Supply and Credit (i.e., DEBT!) has already driven us to the Threshold Hyperinflationary level, while at the same time the DEBT has generated an Economic Stall, -- a condition known as Stagflation, or, more accurately, Hyperstagflation, as we call it. For example, The Real (Hyperstagflation) Numbers for the USA are reported by Shadowstats.com.
“Although Recovery Never Took Place, Official Double-Dip Recession
Likely Will Be Clocked from Second- or Third-Quarter 2012
Reported Contraction in Real GDP Designed to Discourage Fiscal Reform?
Fourth-Quarter Nominal GDP Growth Collapsed to 0.46% from 5.91%
Real Durable Goods Orders Contracted Year-to-Year,
Despite Temporary Orders Boost from Year-End Defense Spending
The economic and systemic-solvency crises of the last seven years continue. There never was a post-2009 recovery in business, just a protracted period of economic stagnation, which began to turn down anew in second- and third-quarter 2012. Prospects for a pending economic recovery remain nil. As discussed in Hyperinflation 2012 and No. 485: Special Commentary, consumer liquidity remains structurally impaired, which supports neither the government’s claims of economic recovery since June 2009, nor current expectations or hype of any unfolding improvement in the broad economy.
Although not statistically significant, the headline decline of 0.1% in real (inflation-adjusted) fourth-quarter GDP—the first quarterly contraction since the official recession—could have been produced with simple massaging of the data. Given the level of guessing included in today’s (January 30th) GDP guesstimate (see below), the Bureau of Economic Analysis (BEA) had the ability to bring in headline growth at any level desired, certainly within a couple of tenths of an annualized-percentage point. Decisions of at least that magnitude had to be made in order to put out the fourth-quarter guesstimate.
At first, deliberately producing a headline GDP contraction may appear to be counterintuitive from a political standpoint, but consider the negotiations ahead in Washington, D.C. With a small contraction reported in the economy, it could be argued by those opposed to cutting the budget deficit, that any move towards fiscal constraint now only would drive the economy into renewed recession, the long-feared double-dip becoming a reality.
In reality, however, the economy already is in that double-dip, a byproduct of the unfolding crises in play since 2006 and before. A sustainable recovery cannot and will not be forthcoming until consumers’ structural income problems are resolved, and until the nation’s extreme fiscal imbalances are addressed.
In other reporting, December new orders for durable goods rose by 4.6%, thanks largely to a temporary surge defense capital spending. That circumstance, however, ran counter to the sharp decline in fourth-quarter defense spending, which helped to drag down the headline growth rate for fourth-quarter GDP.
In addition, as shown at the end of this Opening Comments section, consumer confidence fell sharply in January 2013, beginning to reflect a pattern of movement consistent with a renewed downturn in economic activity.”
“Fourth-Quarter GDP, December Durable Goods, #498”
John Williams, ShadowStats.com, 1/30/2013
ShadowStats.com therefore provides an excellent overview of the Real Economic conditions of the USA and therefore the latest Economic Data.
Shadowstats.com calculates Key Statistics the way they were calculated in the 1980s before Official Data Manipulation began in earnest. Consider
Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported January 16, 2013
1.74% / 9.36%
U.S. Unemployment reported January 4, 2013
7.8% / 23.0%
U.S. GDP Annual Growth/Decline reported January 30, 2013
1.54% / -2.20% (i.e., a Negative 2.20%)
U.S. M3 reported January 24, 2013 (Month of December, Y.O.Y.)
No Official Report / 4.38%
Yet another closely related Threatening Reality going forward is as a result of the Veritable Orgy of Fiat Currency Printing now engaged in by The Fed, ECB, BOJ, and 35 other Central Banks trying to maintain low interest rates and bolster their Bank owners.
This Printing Orgy generates yet another Investment-Critical Baseline Reality impending on the Horizon. Consider that
The US government borrows nearly 50 cents of every dollar it spends. China owns nearly $1.5 trillion of that debt. China is NOT a net new buyer of US debt; it spends its dollars buying up farmland and other natural resources worldwide, including in the US.
China knows that Real Assets are more valuable than Paper Assets.
The US government gets its borrowed dollars from accounting entries at the Federal Reserve, which creates the money out of thin air. The Fed buys over 70% of each sale of US bonds, bills and notes. Other than the Fed and its funny-money, few buyers of US debt exist.
Except that the US dollar is the world’s reserve currency [but will continue to be such only for so long as it is trusted to hold its value], the US is Greece, Spain, Italy or France. That is to say, bankrupt.
Indeed, Zhu Min, deputy managing director of the IMF recently confirmed (at a Global Economic Forum in Hong Kong) tha the Chinese Yuan/Renminbi is set to become the Global Reserve Currency.
To Profit and Protect, the Wise are advised to Keep these Baseline Realities in mind.
Regarding specific Recommendations for Profiting and Protecting, see Notes 1, 2, 3, 4 and 5 below.Best regards,
www.deepcaster.com
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